The Income Tax Act provides that transfer by way of merger of two or more equity/ debt-oriented funds shall not be regarded as taxable transfer by the unit holder.
By Chirag Nangia
I had invested Rs 1,50,000 in Prudence Fund (dividend option) in three tranches from February 23, 2017 to February 15, 2018 for 5,000 units at Rs 30 per unit. On June 1, 2018 this fund was merged with the company’s balanced advantage fund and my holding shrank to 4000 units for Rs 1,00,000 at Rs 25 per unit. On April 4, 2020, I switched to a growth option and have been allotted 2,000 units at Rs 45 per unit. Now on June 1, 2021, NAV of the fund jumped to Rs 90 and my investment value went up to Rs 1,80,000. If I sell now, what will be the long-term capital gains?
—Aloke Ranjan Siddhanta
The Income Tax Act provides that transfer by way of merger of two or more equity/ debt-oriented funds shall not be regarded as taxable transfer by the unit holder. Therefore, there are two incidences of taxation in this case, once upon switching option from ‘dividend’ to ‘growth’ and then upon final sale of mutual funds. The switch was made in FY 2020-21 and therefore capital gain shall have to be calculated and reported in the income tax return for the financial year. Likewise, if final sale of investment takes place in June 2021, the resultant long term capital gain shall be taxable in FY 2021-22 (the return for which shall have to be filed next year).
Further, while the period of holding of mutual funds, that became the property of the assessee on account of merger of funds, shall be taken from the date of initial investment (i.e. in 2017-2018), the period of holding in case of sale of mutual funds so converted, shall be taken from the date of switch to growth plan (April 2020).
For computation of capital gains, the nature of investment schemes shall have to be ascertained. If the mutual funds are equity-oriented then capital gains will be ‘long-term’, if held for a period more than one year and shall have to be computed by subtracting from the sale consideration, the cost of acquisition (without indexation, after considering grandfathering provisions).
The resultant capital gains, in excess of Rs 1 lakh is taxable at 10%. If the mutual funds are debt-oriented, then the nature of capital gains shall be long-term if held for a period more than three years, else the same shall be considered as short-term. While short term capital gains from debt funds shall be taxable at applicable slabs, long-term gains shall be taxable at 20%, after indexation.
The writer is director, Nangia Andersen India. Send your queries to firstname.lastname@example.org